A California Republican

Debt service is a term often thrown around in California budgeting language. What is it, and how does it impact the budget?

Debt service is the payments made on bonds and other debt (mostly bonds) that California owes. Debt service must be paid first, from the General Fund. Sometimes the bonds are payed from special funds, but not normally. In fact, the General Fund is the security for the bonds. When a group sued the state earlier this year to stop the state from selling bonds, the argument was that the General Fund revenues are not secure enough to constitute a “secure” flow of cash that is needed for the bonds. However, the court disagreed and said the General Fund can act as security for the bonds, and bond sales resumed.

At the moment, debt service is approximately 7% of the state General Fund budget. This number is set to rise to 10% by the middle of the next decade once all the bonds that have been sold are in repayment.

When the Governor said he was going to balance the budget, instead he sold bonds to gain access to more money. This money now has to be repaid to those people who bought the bonds. The investors, those who bought the bonds, get the interest payments on the bonds tax-free. it is part of what inspires people to by bonds. All this means is that to balance the budget now, the Governor agreed to let future generations pay back the money. Part of this hinges on the hope that General Fund revenues come in higher than expected in future years, and part of this is an “I don’t care because I won’t be Governor and I  can live wherever I want and don’t have to live with the mess I created” attitude. This is an attitude the Legislature shares with the Governor - just look at thier wish for an $11 billion water bond.

If the water bond was to pass, assuming that California can get a low interest rate in the bond market, the payments on the bond will be approximately $800 million a year. This will increase depending on the interest rate. The last bonds California sold had a high interest rate - 4% - on them. If this is the case, the payment increases.

Debt service has to be paid before anything else can be paid.

One of the interesting things about the bonds is that the bonds all include language that says, in a nutshell, that the Director of Finance can raise revenues necessary to pay back the bonds. What happens if a Director of Finance actually takes this option? No one knows, but it would be interesting to see.

Bonds are a bad deal. Debt service is a bad deal. Just like people with credit card debt who are trying to get out of it, the state should pay off the bonds and live within its means.

The Legislative Analyst’s Office (LAO) recently released a report saying that California faces a $20+ billion deficit in the next budget cycle, and for the foreseeable future. In fact, the report detailed how, under certain conditions, that deficit could rise to $25 billion. So how does the state close a deficit that massive?

From time spent working for the Department of Finance, who right now is putting together the budget the Governor will release on January 10th, I can tell you what they are doing right now. They are doing drills. A drill is where the Capitol Office (the head of the Department of Finance) asks for different cuts in different areas, and other solutions, that must amount to a certain dollar figure for each department. Then the various budget analysts and principals sit down to figure out where they can get that money from. The ridiculous thing in this process is that the Governor cannot simply ask the agencies and departments for the cuts.

The agency and department heads are political appointees who, you would think, would do whatever the Governor asks of them. However, when you ask agencies and departments for areas to cut, they won’t give you any. In fact, the heads of the agencies and departments try desperately to avoid getting their budgets slashed. In a world where there is a huge deficit, and the heads are political appointees and not career civil service, you would think the political appointees would do what the Governor wants. Instead, they stonewall him at every opportunity and leave the dirty work to Finance. So Finance tries to find money, and has to do it on a big level because that is the level Finance works at. When departments and agencies say they can save 10% without furloughs, no one was telling that to Finance when they were asked. Instead everyone says, “We cannot save any money and need all the money we have,” so Finance has to go ahead and do their thing. Which normally amounts to across-the-board cuts.

Taxes are off the table. Most people wouldn’t vote for new taxes right now if you told them that the government was going to default on everything if there were no new taxes. Most voters would like to see the government default, figuring it won’t hurt them. Republican votes are needed for any new taxes in the Legislature and, given the backlash against those who voted for taxes last year, it is extremely unlikely that there will be any Republican votes in favor of new taxes. This assumes that the Governor would sign anything with new taxes and, although he has reversed himself in the past, he seems willing to abide by his “no new taxes” pledge for now.

That leaves spending cuts. Have you taken a look at all the departments and agencies the state funds? It is right here: http://www.ebudget.ca.gov/Enacted/deptIndex.html. There is a Commission on Aging and a Department of Aging. Do we really need both in the state of California? The state certainly doesn’t need a Secretary of Education and a Department of Education. Does there really need to be all these commissions and conservancies that the state is funding? Certainly the job the Housing Finance Authority is doing can be done by the Department of Housing and Community Development.

There are redundancies in all the agencies and departments. In fact, sometimes there are three or more departments with workers who do the same job. There is an Office of Real Estate Appraisers and a Department of Real Estate. These are redundant.

While cutting redundancies and consolidating operations might not save tons of money, it will save some. There are also some things the state is going to have to prioritize. Does the state want to provide health and dental coverage to children, or does it want to pay for services to blind and aging people? What people can be covered by Medi-Care? Should the state drop it’s Medi-Cal program?

If the gap is going to be closed by cuts alone, then these questions are going to have to be asked.

However, we can all look forward to new “fees” in the future. Don’t kid yourself and think the Legislature is going to make the hard decisions and decide on all cuts. There will be more fees and accounting tricks in this budget. Which just leads to a bigger hole next year.

Not all states have a two-tiered university system like California. California has the CSU system, and then the UC system. It is generally perceived that the UC system is a better quality than the CSU system.

Fees for Spring 2010 at the CSU system are$2450 for a full-time, resident undergraduate. This includes a health fee. This does not include fees that special courses, like art, might impose. At the UC system, a full-time, resident undergraduate will be paying $8,100 plus $1,000 (health insurance if they cannot provide proof of coverage).

In Colorado, a state with a two-tier university system, a resident student at the University of Colorado will pay $4,039 for most programs, but up to $5,964 for business. Engineering, art and music have special costs that range between the general undergraduate and the engineering fee. The Colorado State students will pay $265 per unit, for a total of $3180 for twelve units, as a resident undergraduate.

In Texas, a University of Texas resident, undergraduate ill pay anywhere from $4,904 to $4,477 for a semester, depending on their major. A Texas State University resident, full-time student will pay $3,085 for their courses.

In Massachusetts, at the University of Massachusetts, a student will pay $1,714 in tuition, $8,100 in fees and $2,322 for health insurance; assuming they are a resident of Massachusetts, a full-time undergraduate and don’t have health insurance of their own.

So what does this mean for California? It means the CSU students are getting a great deal and should stop complaining about fee hikes. Colleges are supposed to be self-supporting. They aren’t supposed to be government institutions. Why should the government be providing college? They shouldn’t. And so the CSU system has to raise fees, that’s fine. They should also know that more students mean more fees, so let students in. The CSU system raised fees this year, to cover the cost of cuts, and still held less classes and hired less professors, but had the same budget.

The UC system is also a bargain. Let’s be honest, the UC system is better than the University of Colorado and the University of Texas (in most things, football is an exception to the rule). The UC system has a better reputation with employers, so your degree “means” more, which means it costs more. But compared to the University of Massachusetts students, UC students are still getting a great deal.

College costs are all over the place. Which means the UC and CSU systems should hike their fees to cover the costs of operation. It doesn’t mean that they are excluding people. It simply means the same thing that going to college has always meant - it will cost money. Either you have to pay for it - through loans and working - or your parents can pay for it. But regardless, peoples till can go to college and pay for it. It will simply be a little more work.

The LAO report detailed that the state is spending more than it is bringing in. There is simply more spending than revenues. The LAO estimates at least a $20 billion deficit in the budget for the next 5 years.

What does this mean? That the state has to find $20 billion of cuts and fees/taxes.

Where are the largest General Fund expenditures? They are education, prisons, and health/human services. There has to be $20 billion found between these areas so that the budget comes back into balance. This means education reform, prison reform and health/human services reforms have to happen. Otherwise, there is simply no more places to cut.

These past few years the Legislature says they have cut almost $60 billion in spending - but this is simply not true. If there had been $60 billion in spending cuts, then there wouldn’t be a $20 billion deficit. The state isn’t that far out of balance. The truth is that the $60 billion in spending cuts have included many shams, accounting tricks, and things that have been blocked by the courts (the latest court news is that the 10% cut to non-network hospitals who provide Medi-Cal coverage is illegal, and has been enjoined).

So now the state faces a $20 billion dollar hole, and has to find a way out.

For those of you who have been reading this blog, you know that I have pegged the budget deficit for the next budget building cycle at $20+ billion.

I have been confirmed by the LAO who has pegged the budget deficit at $21 billion. Their report will be available on the LAO website, www.lao.ca.gov, at 10am this morning. The report will also detail what the LAO believes can be done about the deficit. It should make for interesting reading.

The LAO is supposed to be nonpartisan, and so the Legislature is supposed to take their recommendations under consideration. However, the LAO always suggests raising taxes and cuts, so the Legislature tunes them out. They always suggest an SRA fee to cover the costs of CalFire, rather than paying CalFire out of the General Fund. That proposal always gets shot down because the lawmakers whose districts would be affected by the SRA fee all come from southern California, mostly San Diego, and they are Democrats.

Isn’t California great? There is a $21 billion budget deficit and people who don’t want to raise local taxes to pay for fire fighting, those same people who build in areas they know are prone to wildfires, dont’ want to pay for firefighting at all? But then they want the firefighters to protect their property when the fire comes.

Let’s see what the LAO has to offer in their report.

On November 9, 2009 the Governor said California will end this fiscal year $7 billion out of balance. The Department of Finance puts this number at $7.4 billion. Both of these don’t consider the possibility that cuts are going to be blocked in the courts. The LAO will release their estimate on Wednesday, and will also present some possible solutions.

However, there is one possible way to save money for the state. This way is unfavorable, but it is possible. There is no law that requires California to run a Medi-Cal program. But there are laws which govern what the program must cover if the state offers the program. One way to save money is to eliminate the Medi-Cal program.

This isn’t a popular solution, and would never pass in this Legislature. But Medi-Cal programs cost a lot of money. Yes, the federal funds come in and help support the program. But there is also General Fund money involved in the Medi-Cal program.

What this would require is a determination by the Legislature that there are other places the money needed to be spent, and that Medi-Cal isn’t a priority. The problem with doing this is that the unions, who support the majority Democrats, would oppose such a move. Medi-Cal provides funding for doctors, nurses, hospitals and those places employ people who are unions. The unions would block this move. Advocates for the poor would oppose this.

However, with estimates of the budget deficit for next year reaching $20+ billion, this might be an option that needs to be considered.

Wildly unpopular, yes. But possible - yes.

Regulatory agencies cost money to run.

According to the 2009-10 enacted budget, the Air Resources Board (ARB) had a total of $879,398,00 in funding, with $196,000 coming from the General Fund (click here to see the detail from the Department of Finance). With that money, the Air Resources Board is considering a policy that would eliminate black cars. Why black cars? Because, according to certain people, black cars absorb more heat, so the drivers use their air conditioners more, which means higher gas consumption. Really? This is what the ARB is spending money reviewing? Take the money, at least the General Fund, away from the ARB. Why spend money on something that is this trivial? If the ARB wants to limit air pollution, why not support a higher gas tax that would make gas more expensive so less gas would be used? This is bogus nanny-state governing. Take their money away and make them focus on real issues.

In a similar issue, the California Energy Commission (Energy Commission) - which is formally known as The Energy Resources Conservation/Development Committee - is deciding whether or not people who want big-screen TVs can have them. They have decided that, in interests of saving power and energy, that big-screen TVs are the huge problem. They don’t want them sold, or used, in California. So instead, you will have to buy them on the Internet. To create this piece of nanny-state regulation, the Energy Commission receives a total of $538,180,000 in Special Funds. Instead of giving the Special Fund money to this waste, let’s re-designate it to a commission that doesn’t try to regulate what we can use in our homes.

The California government isn’t helping anyone with these regulations. Instead, they are trying to nanny-state the people of California. Why concentrate on big-screen TVs? Because it isn’t politically-correct to talk about creating new energy plants or resources. Instead, the government talks about regulation.

If you aren’t appalled by this use of government money, you should be. What happens next? There are already programs you can sign up for to have your thermostat regulated by the government (or quasi-government) agencies. What happens when having your thermostat set at 65 in 90+ degree heat becomes illegal through regulation because it uses too much energy. Instead, your thermostat has to be set at 80, and cannot be set any higher in the winter than 65. Older people might be happy in the summer, but they get cold in the winter. So now there becomes an exception for elderly in the winter. Then an exception for pregnant women - who are always hot - in the summer. Then an exception for people with children. Then an exception for people who are……… you see the point?

All these regulations cost money to build. Each and every regulation has to go through a public comment period that the government pays for. The regulations get to be commented on, and every comment has to be responded to. Then there is putting these regulations into practice, enforcing them, and notifying people of them.

This is absurd! Government is supposed to be concerned with big issues that deal with everyone. There is no way to convince anyone who possesses common sense that a study, which says big-screen TVs are the main energy consumption issues or that black cars are the cause of a significant portion o air problems, that those are valid studies. These are ridiculous regulations that cost the state money to consider and implement.

What a waste of money. When the state is facing a continual deficit, can’t the leaders reign in their agencies and spend money responsibly? Or at least in a way that isn’t so offensive to so many Californians?

Californians believe in individual freedom. These regulations, or possible regulations, are ridiculous. They aren’t going to help the problem, and are simply absurd.

Ballot box budgeting. It is a phrase used by the state government to describe the constraints on the budget process that voters have approved. Such constraints include Prop. 13, Prop. 98, all bond measures, after-school program funding, and all sorts of programs. There is also the requirement of a 2/3 vote to approve new taxes that came with voter approval at the ballot box. These are all examples of what is called “ballot box budgeting.”

There have been many, many articles decrying ballot box budgeting. In fact, having voters approve bonds has proven very costly to the state. In fact, it is a rare occurance where a bond is voted down on a ballot. Instead, voters see bonds as “free money” where they get to have the governemnt spend money without raising taxes. This simply isn’t the case - bonds have to be repaid, and that means an increase in taxes down the road somewhere. Probably when those same voters are elderly and living on fixed incomes.

However, the Center for Governmental Studies has created a new study. It dispels the myth that it is the voters who are mainly responsible for ballot box budgeting. The Legislature says that voter-initiatives are the main source of ballot box budgeting. But this study shows that of the $12.85 billion worth of ballot measures voters approved between 1988 and 2009, 83 percent were placed on the ballot by the Legislature. How is this the problem of the voters? The Legislature is causing the ballot box budgeting problem all on their own.

The study found that found that of the 68 ballot measures requiring additional funding passed by voters between 1988-2009, 51 originated with the Legislature while 17 were placed on the ballot by proponents who successfully gathered the requisite number of signatures. Of the 68 ballot measures examined in the study, 52 were bond measures (which  constrain the Legislature in spending because of the requirement to repay the debt first, and the strings attached to the bond money).

If the Legislature is causing their own constraints by offering ballot measures, maybe they should stop. Instead of blaming the voters for ballot box budgeting, maybe the Legislature should plan out what the priorities of the state are. If the Legislature wants to prioritize education, then we should pay for education out of the General Fund - not bond funds. If social services are a priority, the same logic applies. Instead of doing this, the Legislature simply asks the voters to approve bonds, which then put a tighter and tighter squeeze on the budget in the following years when the debt has to be repaid.

Legislature - stop blaming others for your problems.

More and more borrowing. That is what the state of California is relying on to pay for everything these days. There are bonds to cover building new children’s hospitals (even though that bond money goes to mostly private hospitals, not public). Bonds cover building new schools and improving technology at the schools. And bonds cover water - but not just water. They also cover pork projects to get local and legislative leaders to vote for the bond.

The Gov defends the water bond, and its $11.1 billion price tag, by saying that water is an important issue, and that the bond will leverage $25-$30 billion in federal funds. What is the state doing relying on federal funds? There isn’t $25-30 billion in the federal budget to give to California for any reason - so why try and use that as a selling point?

Regarding the pork, the Governor says there is not pork. Rather, “A lot of times people call something pork when in fact it is something really important.” He goes on to say that “It’s important that when those communities all of a sudden see the bond and ask themselves ‘what is in it for us’ … then you can go and have the mayor say, ‘Well, we got this amount of money for cleaning our groundwater.” This is in reference to the $1 billion in the bond to clean groundwater.

While cleaning ground water is an important part of making water usable, how exactly is $250 million for paying to remove the dams on the Klamath River not pork? The money benefits a private company, PacifiCorp and its owner Warren Buffet. The state doesn’t have to contribute any money to this. But, because Mr. Buffet is an old friend of the Gov’s, he managed to find $250 million to help take down the dams. How is this not pork? Why is this important?

How is $20 million for economic development in Siskiyou County not pork? I think every community would like to receive $20 million for economic development. But that isn’t happening. Instead, Siskiyou gets singled out for extra money. Pork.

The $30 million blanket appropriation for “watershed education facilities” is also pork. Although no one knows what a watershed education facility is, or how it is related to improving the water supply in California, it is pork. If people knew what the education facilities were, and knew how they were important, it would not be pork.

The Governor says the borrowing will be spread out over the years to limit the impact of the debt. But that’s not how bond debt works. Once the bonds are sold - at whatever interest rate they sell at (recently, California has had to sell bonds at a high 4% interest rate) - the bonds have to be repaid according to the terms of the bond. Spreading it out doesn’t lower the debt impact, it simply puts it off for a few years. And if the bonds can be sold at different intervals because all the money isn’t needed right away, what is wrong with a rolling budget cycle plan? Where the money is paid out of the budget on a rolling basis so that the state doesn’t have to get into more debt to pay the interest on the bonds. The only problem is that the water projects would be subject to legislative whimsy each year, which would be difficult.

The Gov didn’t do a good job at defending this bond. There is over $1 billion for dirt! Dirt. They are going to have to dig holes to do what they want - so why not use that dirt? Why buy dirt? But, the state of California feels that they are a full employment act, so buying dirt is a good thing.

This bond is simply another way to raise the debt California has. It is a way to say that “they solved the problem.” Because if the voters don’t pass the bond, then the Legislature will say that they tried, but the voters don’t want the problem solved. Now it is the voter’s fault because the Legislature wanted to raise more debt and the voters said no to more debt, but yes to a water solution. Blame the voters - that is going to be the Legislative response next election.

Instead, it should be “blame us” because we put a bond measure on the ballot that smells like rotten meat - pork in fact.

It is November 10th - exactly 2 months before the Governor releases his budget on January 10th. This morning, the Governor announced that there is a $7 billion hole in the budget that must be closed. His solution - massive cuts and no tax hikes.

How did this hole come to be? And will the hole stay at $7 billion?

Let’s tackle the second question first. The answer is, the hole is only going to get bigger. Remember the last budget cycle where the first deficit was announced at $7 billion, but grew to $24.4 billion? The same thing is going to happen. Currently, that $7 billion doesn’t build in any of the costs-cutting measures that were overturned by the courts. The Governor hopes to win those cases on appeal and have the cost-cutting measures reinstated. This includes cuts to in-home health care services, cuts to medical providers, “borrowing” from local funds and the gas-tax fund.

The hole also doesn’t include further declines in tax revenues. Currently, the state is $1 billion behind in tax revenues through the first three months of the 2009-10 fiscal year. This means that, as tax revenues continue to drop, the budget deficit will increase. If there is a $1 billion drop through the next three quarters - and no other changes - that puts the $7 billion number up to $10 billion.

The $7 billion number also does not include the budget gimmicks which have failed to work out. The insurance fund has not sold - that was a $1 billion solution in the budget which has not worked out. Surplus property has not been sold. There are any multitude of accounting schemes that were worked into the budget to close the deficit for this fiscal year which have not worked out. When the day is over and the fiscal year closes, these accounting gimmicks are going to add up to over $5 billion - and possibly much more. This means the deficit increases even more.

If you add to that number the bond repayments that are going to be added to the General Fund because the bonds have sold, the deficit number continues to rise. Bonds simply cost much more than expected, and must be paid before all other obligations. This means that the more California spends on debt service, the less they have to spend elsewhere.

What are some of the solutions to these problems? Community colleges should raise their fees. If the fees were raised from $20 per credit hour to $30 per credit hour, that amounts to an increase of $150 per semester - or $600 over the course of a 2-year college career. That is manageable for most people, and will increase the amount of money community colleges receive. Community colleges should also consider revising their athletics policies. Some community colleges have sports teams - and those who do have them, they all get funded by the school because they are not self-supporting. Revise those policies to eliminate sports teams, and move to an academic and career-training focus. This will be good, all around, for community colleges because then they can serve more students and save money to spend on career-training classes.

There is another solution - revise Prop. 98. This will never happen because the teacher’s unions are too powerful, and they have already been dealt a blow by the Legislature when the Legislature allowed test-scores to be used as indicators of teacher performance. The teacher’s unions do not want to be dealt a second blow to their political clout. However, Prop. 98 eats up approximately 50% of the General Fund budget. It isn’t getting Californian’s better schools, or better educated children. Prop. 98 isn’t doing the things is was supposed to - so why continue to have it around as a drain on the state? Instead, focus on cheaper and better delivery methods for education. There is a lot of success with online public schools, or co-ops between charter schools, parents, and community colleges. Why not take these models and use the successful ones as a model for what public education should look like?

Regardless, California faces another downturn in the budget cycle. It should be interesting to see what is done when the budget is released in 2 months.